Publication
Relief is Here: N.S. Registered Defined Benefit Plans Get Temporary Solvency Funding Relief
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August 11, 2017
By Hugh Wright, at McInnes Cooper
After years of low interest rates, and correspondingly high solvency liabilities, there’s growing recognition that the solvency funding model is broken. Nova Scotia has now followed other Canadian provinces and territories offering either temporary solvency relief (as in Ontario and B.C.) or moving away from solvency funding entirely (as in Quebec and currently being pursued in Ontario). Effective August 8, 2017, the N.S. government implemented amendments to the N.S. Pension Benefits Regulations to give N.S. registered defined benefit pension plans temporary solvency relief:
Changes. The solvency amortization period for N.S. registered defined benefit plans is extending from five to fifteen years, and they have the ability to reamortize existing solvency deficits from the current five year payment schedule to a 15 year payment schedule.
Eligibility. Eligibility for the 15 year funding timeline is for valuation reports with valuation dates from December 30, 2016 to January 2, 2019.
Member “Consent”. The 15 year funding period can only be accessed if the Plan administrator gives notice, with the prescribed information (full disclosure to Plan members of the financial position of the Plan, and the impact of the revised payment schedule) to the members, and no more than one third of the members object. A trade union binds the plan members it represents. Members must be given 45 days in which to object. Pension plans with a required actuarial review effective as of the end of 2016 must file their actuarial report within nine months – by the end of September. Plan administrators will need to proceed promptly to issue the notice, and likely will need to seek an extension from the Superintendent on the filing dates.
Economic Benefits. Solvency funding rules have a number of unintended adverse consequences:
- Contribution Instability. Due to the volatility of capital markets, the solvency funded positions of pension plans and resulting contribution requirements can vary considerably from one valuation to the next. This makes annual budgeting, long-term planning and balance sheet management a difficult exercise.
- Capital Drain. Requiring funding of solvency liabilities by plans with sound going concern funding ratios represents over-funding and potentially stranded capital because the contributions can’t readily be withdrawn when interest rates rise and such plans are in surplus. This potentially uses significant capital that would otherwise be invested in the productive economy to fund future economic growth.
Reasonable pension funding requirements, such as those that result under this new 15 year funding schedule, have several positive economic impacts. The 2014 Report of the Nova Scotia Commission on Building Our New Economy (a.k.a. the “Ivany Report), which the N.S. government has endorsed, emphasized global competitiveness as the key to Nova Scotia’s future success. These changes advance that objective:
- More Cash. Solvency funding contributions divert cash; the changes free that cash up to be invested in productive growth.
- More Jobs. Lower investment leads to reduced job creation; more investment … more job creation.
- More Competitive Employers. There’s a balance between affordability and security of the pension benefits – but a successful, competitive, profitable employer is the best contributor to a thriving economy and the best long term guarantor of the health of a pension fund.
Please contact your McInnes Cooper lawyer or any member of the Pension & Benefits Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2017. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
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